Expansion Into Oil And Gas, Railways, And Farm Equipment Will Strengthen Future Prospects

Key Takeaways

• Strategic expansions in Jamshedpur and Mexico aim to boost production and revenue diversification, reducing reliance on commercial vehicles.
  
• Focus on value-added products and engineering is expected to enhance net margins and overall earnings.
  
• Macroeconomic challenges, rising operational expenses, and reliance on new sectors pose risks to Ramkrishna Forgings' revenue growth and net margins.

Catalysts

Engages in the manufacture and sale of forged components for automobiles, railway wagons and coaches, and engineering parts in India and internationally.

• The integration and capacity ramp-up of recently acquired subsidiaries, along with the introduction of a new aluminum forging facility in Jamshedpur and expanded cold and hot forging capacities, are strategic moves expected to boost future revenue by supporting diversification and increasing production capabilities.
  
• Diversification within the automotive sector and expansion into non-automotive segments such as oil and gas, railways, and farm equipment are anticipated to enhance future revenue streams and reduce dependence on the commercial vehicle sector.
  
• The company's strategic positioning in the North American market through its operations in Mexico is expected to improve revenue by providing a hub to serve international businesses, increasing competitiveness in the region.
  
• Securing significant new orders from the mining, earthmoving, oil and gas, and railway segments is likely to bolster future revenue and reduce reliance on the automotive sector.
  
• The ongoing improvements in gross margins due to the focus on value-added products and advanced product engineering are expected to enhance net margins over time, contributing to better earnings.

Ramkrishna Forgings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ramkrishna Forgings's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.0% today to 12.3% in 3 years time.
• Analysts expect earnings to reach ₹6.9 billion (and earnings per share of ₹40.42) by about January 2028, up from ₹3.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.0x on those 2028 earnings, up from 36.1x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 2.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.3%, as per the Simply Wall St company report.

Ramkrishna Forgings Future Earnings Per Share Growth

Risks

• Macroeconomic challenges, such as a moderated demand for commercial vehicles, can limit revenue growth if the trend continues or worsens.
  
• Increased operational expenses, particularly related to newly acquired subsidiaries and Mexico operations, have pressured net margins and could continue to do so if not managed efficiently.
  
• Delays in capacity utilization, like the time taken for cold forging capacities to come online, can slow expected volume growth and affect earnings.
  
• Dependency on new sectors such as electric vehicles and non-automotive segments introduces execution risk, potentially impacting projected revenue if these new ventures don't perform as anticipated.
  
• The impact of fluctuating raw material prices on realization could negatively influence revenue and margins, given that the company has had to adjust with reduced realization in the face of rising costs.

Valuation

• The analysts have a consensus price target of ₹1144.0 for Ramkrishna Forgings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1500.0, and the most bearish reporting a price target of just ₹870.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹56.0 billion, earnings will come to ₹6.9 billion, and it would be trading on a PE ratio of 42.0x, assuming you use a discount rate of 14.3%.
• Given the current share price of ₹774.95, the analyst's price target of ₹1144.0 is 32.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.